How Blockchain Technology Works
The blockchain technology is a type of distributed ledger that is secured using cryptography. The blockchain was not a new invention. Rather, it was a combination of three existing technologies, which have been around for decades. These technologies are the private key cryptography, a distributed network that uses a snared ledger, and an incentive to verify transactions, security, and record keeping. We at Bit Gale have taken time to break this down for you so that you can understand the blockchain.
Cryptographic keys
When two people wish to transact over the internet, each one of them will have a private key and a public key. The main reason for this component of the blockchain is to create a secure digital identity. To verify your identity, you will need both the private and public key. When these keys are combined, they create an extremely useful digital signature. This signature is what helps to create ownership.
Even with the keys, you will only have strong control, which is insufficient in securing a digital relationship. With authentication solved, you will need a means to approve the transactions or the permission. For the blockchain, the permission starts with the distributed network.
Distributed Network
To understand the distributed network, you can turn to the ‘if a tree falls in the forest’ thought experiment. If a tree falls in the forest and there is someone to see and record it, we can be sure that the tree fell.
The value of the blockchain works in much the same way. The validators are the person with the camera. If everyone in the forest reaches the same conclusion, then, we can confirm that it happened. However, instead of cameras, the validators have a mathematical puzzle. In short, the network is only as secure as its size.
This is the reason why Bitcoin has become so popular; it is so large that disputing a transaction would take immense computing power. Today, Bitcoin has is secured by 3.5 million TH/s which is more than 10,000 of the biggest banks on earth. Ethereum, which is much younger, is secured by 12.5 TH/s, which is still larger than the computing power of Google.
A system of record
When the cryptographic keys are combined with the network, a useful form of digital interaction is created. In this process, it entails the sender taking their private key and attaching it to the receiver’s public key. This is all recorded publicly in the network. After that, various transactions within a specific period are grouped together, time-stamped and broadcast to all nodes in the network.
The Incentive
Going back to the analogy of falling tree, a realist might ask why people would be standing in the forest to record a falling tree. In short, how do you attract people to verify that a transaction has indeed taken place?
For the public blockchain such as Bitcoin, this involves mining. Mining entails you offering the processing power of your computer to solve a complex equation. When you confirm a transaction, you are rewarded for the effort. Thus, you become motivated to help secure the network.
With Bitcoin, the aim is to ensure that a Bitcoin is not used in a transaction twice. This way, Bitcoin seeks to act as gold. For Bitcoin to be valuable, they must be unique and impossible to corrupt. To achieve this, all the nodes in the network work hard to create a permanent record of each transaction that occurs.
In essence, they vote with the power of their CPU, which they use to express their agreement or rejection of block. When more than half of the miners agree on the same solution, they add this new block to the permanent chain. This chain is then synchronized with all people who own Bitcoin. The block is also timestamped, and it can contain a message or data.
The amount or type of verification can vary for each blockchain and the network it powers. It is about the protocol with which it was created or the rule for what is a valid and what is an invalid transaction. Every creator of a blockchain can come up with his or her own mode of verification. However, the method created by Satoshi Nakamoto and described above has continued to be the gold standard for virtual coin mining.
However, it is all about choice, and there are already those who are starting to experiment with new concepts. Blockchain technology is at a stage where people are just starting to toy with it. For a long time, there has not been much interest in it. However, due to the rapid rise in the value of virtual coins, people are paying attention. What everyone knows so far is that we do not fully grasp what is entirely possible with this technology.
If you have an interest in Bitcoin and the blockchain, this should help to get you started. Keep in mind that the use of blockchain technology goes far beyond just virtual currencies.